When the short-term cost of the home outweighs the long-term benefits of building up equity then it's time to get out, and when you put no money down, it's awfully tempting to just walk out on the mortgage, despite whatever ethical objections you might have. If this starts happening all over the area, the irony is that you can walk out on your mortgage and then come back and rent the same house or something very similar in the same area for about what you were paying on that mortgage or even less when the banks, homebuilders and speculators get desperate. Here in the Austin area we don't have anywhere near the foreclosure rate you see nationwide, but you do see these repo homes coming back on the market at a discount of 10 to 20 percent off their original new price, or showing up as lease-to-own or straightout rental properties. In other parts of the country where developers were more overextended and the economy isn't as strong the selection is better and the prices are even lower. Ultimately the market takes care of everyone and supply will adjust to meet demand.
The problems with this whole situation come when it's looked at on a nationwide basis. The level of foreclosures, repossessions and abandonment of homes is at the highest level in 20 years, with as many as seven million of these starter homes up for grabs. There are two main areas of concern:
First, there is a lot of handwringing over the fate of the poor homebuyer who was suckered into buying a house they couldn't really afford, taken advantage of in their inexperience and saddled with a terrible and exploitative loan, and ultimately put in a situation where they were better off losing the house and even declaring bankruptcy than staying in it. To make matters worse, these buyers were disproportionately members of minority groups who many feel have suffered and been exploited enough.
Second, there's the problem which the mortgage banks which were heavily involved in this market face. Some large banks like Countrywide and Washington Mutual were involved in this market and although only a few of the smaller players have actually gone bankrupt, they're all cutting back on loans, consolidating and have reduced dividends and seen a corresponding decline in their stock values. They in turn have put pressure for credit to cover their losses on the larger banks which back them, putting stress on their reserves and creating a problem which has spilled overseas to international banks and raised the concern of government regulators, who responded last week by pumping $38 billion into the banks in the form of federal credit.
Article comments
1 - Lumpy
It really is shocking how ignorant most people are about personal finances and basic business practices, even college graduates. They can't even balance a checkbook much less handle anything involvimg credit. And so many of them are carrying huge student loan debt. It's ridiculous.
2 - Dave Nalle
I need to write an article about student loans and college costs in general - the one thing in the economy which has exceeded the rate of inflation every year. I'm particularly sensitive to the subject because I've got a teenager headed off to school in a couple of years and she's looking at colleges that cost $40K a year - how the hell is anyone supposed to pay that?
Dave
3 - Nancy
The colleges are also sinks of uncontrolled, unregulated spending. Talk about throwing money down ratholes, or good money after bad, IMO-! The irony is, they're notorious for not paying any but the top echelons of faculty (the "names") decent wages - & the Names are 'way overpaid, like all CEOs.
In any event, good article, & for once I agree w/your economic analysis & proposed solution, Dave. A combination of stupid, ignorant consumers & greedy, irresponsible sellers is a baaaaad thing. Very.
Speaking of education, they USED to make all of us (back in Neanderthal days when I was in school) take a semester of basic living skills, which involved balancing checkbooks, reading a bank statement, reading labels, basic consumer legalese, etc. Obviously they don't do that anymore, or are today's kids just too dumb to learn?
4 - Dave Nalle
I think it's been a long time since they had a practical skills class like that, Nancy, but apparently some effort is being made to bring them back.
As for college pay, I sure know what you're talking about. As a junior faculty member I had to teach all the most boring classes and got paid less than half what someone with tenure would get.
Dave